Last year I blogged about the Cash for Clunkers program in which the government subsidizes consumers who turn in their beat-up old cars to buy new ones. I noted that this program was likely to have a host of negative unintended consequences that its proponents were ignoring.
The bad news is that the House of Representatives has now passed a Cash for Clunkers bill. The good news is that the version they passed applies to so few vehicles that there is virtually no incentive for anyone to take advantage of the program, so its unintended consequences will be smaller than they otherwise would be.
The Detroit Free Press reports:
Under the plan, owners of cars and trucks that get less than 18 m.p.g. could get a voucher of $3,500 to $4,500 for a new vehicle, depending on the mileage of the new model.
The plan does have several hurdles that will keep some potential buyers on the sidelines. The clunker being traded in will be crushed or recycled, meaning it will have no trade-in value beyond the voucher. Of the 25 million vehicles estimated to qualify for the voucher, most will be trucks: even 15 years ago, only five models of midsize sedans managed just 18 m.p.g.
To ensure the vehicles being crushed are actually coming off the road rather than cinder blocks, the trade-ins have to have been registered and insured for at least the past year.
According to that same newspaper report:
With auto sales running at their lowest rate in four decades, the Congressional Budget Office estimated the bill could spur sales of about 625,000 vehicles; backers are hoping for 1 million.
The act “will shore up millions of jobs and stimulate local economies,” said Rep. Betty Sutton, D-Ohio. “It will improve our environment and reduce our dependence on foreign oil.”
My guess is the estimate of 625,000 extra vehicles sold is hopelessly optimistic (although, of course, it depends on how long the program is in place). Let’s assume they mean 625,000 vehicles in the first year.
Twenty-five million vehicles that qualify based on m.p.g. represent roughly 10 percent of the vehicles on the road. I’m not sure what fraction of those have a trade-in value less than $3,500 or $4,500 but are still being driven. Perhaps some blog readers know that number. I’m going to guess roughly 20 percent, or 5 million vehicles, which is not such a small number.
But let’s say you own one of those vehicles which you could sell for $3,000. If you use Cash for Clunkers you get an extra $1,000 for your vehicle. So of those 5 million people driving gas-guzzling old beaters that are worth almost nothing, how many of them are going to be pushed over the margin to buy a fancy new vehicle because of a $1,000 subsidy?
Logic suggests that number will be small. I doubt a new vehicle is the logical next car for these folks, and a $1,000 subsidy just isn’t very large; look at the rebates and deals the automakers themselves are offering these days.
If any vehicles are going to qualify under this program, I suspect it will be because enterprising people who already plan to buy new cars will go out and buy old junkers on the used-car market and then trade them in under the program. But those transactions won’t represent incremental new car sales; it will just be a way for people who were already going to buy a car to rip off the government.
One thing will happen: entrepreneurs will play the role of the middleman, buying old beaters and then reselling them to people who are about to buy new cars, skimming off a little profit along the way.
If I weren’t so busy, I might just start that kind of business myself.
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The bill’s requirements are restrictive, but not unrealistically so, in my opinion. I’ve played around with the online Kelly Blue Book a bit and can certainly see people making use of it.
Try this scenario on for size: a middle-class family that doesn’t care much about keeping up with the Joneses has a 1999 Ford Explorer, V8, automatic, four-wheel drive, in fair condition with 150,000 miles. It gets 14 mpg combined according the EPA’s scheme for re-evaluating pre-2008 mileage to be comparable with 2008+. In my experience, this is a totally reasonable vehicle to still have on the road, but it trades in for $1,125. To go a little newer, a 2001 Explorer in similar shape with 120,000 miles has a trade-in value of $2,050.
Here’s another: A 1999 Dodge Caravan with the big V6, two-wheel drive, fair condition, with 150,000 miles gets 18 mpg combined (just barely qualifies), and trades in for $775. An equivalent 2001 model with 120,000 miles goes for $1,975.
You really don’t have to be talking about some awful hunk of junk to qualify; I think plenty of people drive cars like this.
I am angry that there will be yet another bailout that I do not qualify for. If my neighbor made a bad decision by buying a gas guzzler, but I bought a car that is efficient, why should my tax dollars help my neighbor upgrade?
Hey Obama: Stop spreading the wealth around!
I think you have to prove the vehicle has been insured to you for a year, not just anyone, thus mitigating the potential for people to exploit that loophole and buy clunkers and trade them in.
I’m not sure of the environmental benefits on the whole, given the environmental impact of building a new vehicle but I think my parents are going to take advantage of it and trade in a 1996 mazda mpv. So there’s one sale
To Chris Markl
I was about to comment that few people would actually do the math/ make the effort to determine whether their old cars were worth more than the subsidy, what the difference was, whether it was worth it to get a new vs less expensive newer-but-used car, etc. … and then you proved me wrong in the very first comment.
“But let’s say you own one of those vehicles which you could sell for $3,000. ”
I don’t think that is a good assumption. I have several construction workers in my family, and when they go to buy a used truck, especially one 5 years old or older as implied by this law, 3K would be well above what they would expect to pay. You have to remember older work trucks generally have seen some pretty hard use. I think the incentive would therefore be closer to 2K or higher than the 1K you figure.
The improvement in mileage required by the program is pretty pathetic considering that the old vehicle must get less than 18mpg:
If the new car replacement achieves at least 4 mpg better, a $3,500 voucher would be awarded, and if the new car achieves at least 10 mpg more, the credit would be $4,500.
For trucks, replacement vehicles need to net at least 18 mpg, with at least 2 mpg improvement. In order to receive the full $4,500 voucher, there must be an improvement of at least 5 mpg.
I think that the standards for improvement should be at least doubled considering the new 2010 prius gets 50mpg.
The real problem is that the program is underfunded and unrealistic, for many of the reasons cited.
Make the “cash for clunkers” a more realistic figure – say 80% of the bottom-end average resale value, then split the payment in half – the first half delivered on proof of purchase of a new vehicle which delivers a minimum acceptable EPA rated MPG (say 28 mpg combined) – the second half deliverable on proof of the scrapping of the clunker.
You may want to talk to the Car Talk guys about this, but I think there’s another counterproductive consequence to this plan. Unless the car is belching out enough pollution to rival KÄ«lauea, scrapping it now and buying a new car would be worse for the environment than keeping it in good repair for a few more years. This plan seems to neglect the energy costs and byproducts it takes to make a new car (from making the steel to powering the robot assemblers), which are not insubstantial. As long as a car can pass the emissions test, keep running it into the ground.
Of course, automakers, unions, and politicians have substantial incentives to see it the way they do, which may have more to do with this bill than any energy concern.